Stock and Index Option Strategies


The Basics


An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

There are two types of option:


Call holders and put holders are not obligated to buy or sell; they can let the contract expire under unfavorable conditions.

Call writers are obligated to make good on a promise to sell the asset at the contract price.

Put writers are obliged to make good on a promise to buy the asset at the contract price.

An option is always tied to an underlying asset: a stock or an index. In the case of stock options, an option represents 100 shares of the stock.

The strike price of an option is that price of the underlying asset above which a call, or below which a put, must go before the option can be exercised for a profit (“in the money”). The option must be exercised before the expiration date.

The amount by which an option is in-the-money is called its intrinsic value.

The total value of an option is called the premium. A premium of an option is equal to its intrinsic value plus its time value. The time value of an option represents the possibility of the option increasing in value.

        Premium  =  In-the-Money Intrinsic Value  +  Time Value

Options can be traded in a secondary market. So there are three outcomes for an option: it can be exercised any time before expiration, it can be allowed to expire, or it can be sold back into the market before expiration (“traded out”). CBOE says

Options Trading Tutorials and Videos

Here are some helpful videos about options trading:

Investopedia: Options Basics Tutorial
Option Strategy Finder
6 Great Option Strategies For Beginners


Equity Options Strategies

Buying Calls: Close Above Break-Even Point
Buying Calls: Close Between Strike and Break-Even
Buying Calls: Close Below Strike

Covered Calls: Close Below Strike Price
Covered Calls: Close Above Strike Price
Covered Calls: Early Assignment

Protective Puts: To Protect Existing Stock Profits
Protective Puts: Put & Stock Purchased Simultaneously
Protective Puts: To Protect Falling Stock Price

Buying Puts: Close Below Break-Even Point
Buying Puts: Close Between Strike and Break-Even
Buying Puts: Close Above Strike

Cash-Secured Puts: Selling an Out-of-the-Money Put
Cash-Secured Puts: Selling an In-the-Money Put

Covered Combinations: Close Above Call Strike
Covered Combinations: Close Below Put Strike
Covered Combinations: Close Between Strikes

Equity Collar: Close Below Put Strike
Equity Collar: Close Above Call Strike
Equity Collar: Close Between Strikes

Stock Repair: Stock Declines
Stock Repair: Stock Unchanged
Stock Repair: Stock Higher

Iron Condor
Butterfly
Product-specific Strategies: VIX, SPX, DJX, etc.

Buying Equity LEAPS Calls To Anticipate A Rally
Buying Equity LEAPS Calls As A Stock Alternative
Buying Equity LEAPS Puts To Hedge The Value Of Stock Owned

CBOE - S&P® Daily Reports;   Login.


Index Options Strategies

Buying Index Puts to Hedge the Value of a Portfolio: Close Below Strike Price
Buying Index Puts to Hedge the Value of a Portfolio: Close Between Strike and Break-Even
Buying Index Puts to Hedge the Value of a Portfolio: Close Above Break-Even
Buying Index Puts to Hedge the Value of a Portfolio: Calculate Contracts to Hedge

Buying Index Calls: Close Above Break-Even Point
Buying Index Calls: Close Between Strike and Break-Even Point
Buying Index Calls: Close Below Strike

Buying Index Collars to Protect Portfolios: Close Below Put Strike
Buying Index Collars to Protect Portfolios: Close Between Strikes
Buying Index Collars to Protect Portfolios: Close Above Call Strike

Buying Index Puts in Anticipation of a Market Correction: Close Below Break-Even Point
Buying Index Puts in Anticipation of a Market Correction: Close Between Strike and Break-Even Point
Buying Index Puts in Anticipation of a Market Correction: Close Above Strike

Buying Index Straddles in Anticipation of a Major Market Move: Close Above/Below Break-Even Points
Buying Index Straddles in Anticipation of a Major Market Move: Close Between Break-Even points
Buying Index Straddles in Anticipation of a Major Market Move: Volatility Change Before Expiration

Index Option Strategies - Iron Condor
Index Option Strategies - Butterfly


This is an example of the kind of daily advice offered by source like e*trade:

American Express (NYSE: AXP): Buy at least 100 shares and simultaneously sell to open October 2018 $100 calls. The stock is lately right near $100 (at $100.20), and you'll be in the same options as we are officially. The net debit to set up this trade is lately $96.40 per share, or $9,640 per 100 shares.

Intel (NASDAQ: INTC): Buy at least 100 new shares of Intel, and simultaneously sell to open Sept. 21, 2018, $49 calls. The net debit to buy stock and sell these calls is lately $46.87 per share, or $4,687 per 100 shares. Don't cover shares you want to keep. (Members in our existing Intel covered calls should wait for official guidance -- they're on track to become income.)

Skyworks Solutions (NASDAQ: SWKS): Sell to open Sept. 21, 2018, $90 puts. Lately paying you about $2.05 each, these provide a 2.2% yield in 52 days. (Note that major customer Apple will report earnings after market close today, so don't write these puts if that worries you.) Sell one put for every 100 shares you could buy for $9,000. (Members who have written other puts on Skyworks should continue to let time value dissipate and roll as it does, keeping the same strike price. We'll have official guidance on our August $105 puts by next week.)

IBM (NYSE: IBM): Set up a synthetic covered call. Write ("sell to open") the January 2020 $145 puts, buy ("buy to open") an equal number of January 2020 $145 calls, and write ("sell to open") an equal number of October 2018 $150 calls. Combined, you should be able to pull out a net credit of $4.95 or more. Note, this is an advanced strategy. Be sure your brokerage permissions will allow this position, and do not forget that each written put commits you to purchasing $14,500 worth of stock come expiration, if necessary. Be careful not to overexpose yourself!

PayPal (NASDAQ: PYPL): Set up a covered call by first buying stock. Then, for every 100 shares purchased, write ("sell to open") one October 2018 $85 call. Pay no more than a $79.20 net debit.

Starbucks (NASDAQ: SBUX): Set up a diagonal call. In one transaction, buy ("buy to open") the January 2020 $30 calls AND write ("sell to open") the October 2018 $52.50 calls, for a combined net debit of $21.10 or less.